Introduction

Steve: All right, I’m here with Gregory Kovsky, the president and CEO of IBA. How’s it going, Gregory?

Greg: Wonderful. It’s nice to start the new year.

Steve: Kicking off the new year strong. I’m excited to get into tactical advice drawn from your extensive experience in M&A, and I’m eager to get there.

From a Veterinary Hospital Sale to M&A

Steve: But before we do, let’s talk about your background. How did you get started in this space?

Greg: Certainly. My first exposure to business brokerage was actually as a child. My father sold his veterinary hospital and the associated real estate through IBA in the 1980s, and he found it a positive experience. He went on to pursue the next chapter of his life working for Hill’s Pet Products. So as a young man, I saw an entrepreneur sell a business.

I went to the University of Texas, studied business and investment finance, pursued a first career, and came back to the Northwest in 1994. I didn’t know what I wanted to do next. My father said, “I think you’d be good at selling businesses. You’re a salesman by personality, and you have an academic background in accounting and finance.” So he introduced me to the founder of IBA, and I joined the firm in 1994. I emerged as one of the top salespeople with the company and took over management of our Bellevue, Washington, office. Then in 2000, when the founder wanted to retire, I bought the company from him in an internal sale. I’ve been at the helm for 25 years, going on 26 at this stage.

Steve: Amazing. So you’ve been at it for quite a while. You’ve seen a lot of deals, done a lot of deals yourself, and been part of many more. I think you said you had 12 or 13 offices across the Northwest?

Greg: Ten offices in the Pacific Northwest. We’re not up to 13 yet. Maybe that’s a goal.

Steve: There we go.

Greg: Thanks for the goal setting for the new year. And I have about 20 brokers on my team doing transactions. I would say 70% of my time is executive sales management, and 30% is still deal work. I believe in being a player-coach, and I want to know the market dynamics. Plus, I like being in the game. There’s an adrenaline rush to putting together a transaction, and I’m not ready to give that up.

Steve: Deals involve a lot of raw creativity in the structures, and it is fun. Everybody I talk to says the most fun part is coming up with creative structures when people can meet in the middle. It gets exciting.

Preparing for an Exit: Start With the Value

Steve: Let’s talk about preparing. I think everyone listening could use your experience as a starting point. When you talk to a business owner looking to sell, what do you guide them through to prepare for an exit?

Greg: The starting point is always: what is the business worth? My firm offers a complimentary valuation of a business. We do it for free because we want to audition for the job, share our knowledge, experience, and customer service, and provide a likely market value for the business. On our side, it’s about making sure we want to work with the owner, that we like the business model, and that they’re realistic about value.

I always say you have to start with the end in sight. If the price you believe you can deliver in the market won’t satisfy the owner, why start the game? Maybe they want to retire, but the exit value isn’t enough. The solution may be two more years of the annuity of being an entrepreneur and running the business until they get to the point where they can exit. So it’s about building a relationship and moving forward.

The Four Sales in Every Business Sale

Greg: Then it’s about educating them on the process. When you sell a business, you actually have to complete four sales, and many people don’t realize this.

The first sale is to the buyer. They’re the easy one, because they have emotion and want to do this.

Then the buyer hands the deal to their CPA or CFO, and you need a thumbs up from them, or the deal dies.

Then you have to sell it to the attorneys, who aren’t as worried about the price as about the liability being assumed. If they believe there’s too much risk, they won’t endorse the deal, and the deal dies.

And finally, he who has the gold makes the rules. You have to sell it to the bank or investors.

Each of those sales is different. It’s a different audience with a different knowledge set, and as a professional M&A intermediary, you have to be prepared to effectively sell all four parties.

Steve: I like that. All the different people coming in, with different knowledge and different backgrounds, and every deal is different. If you look at it as game theory, every player is different in every scenario. I enjoy that. It makes it more interesting.

The Best Time of Year to Sell a Business

Steve: When it comes to timing, in your experience with all these deals, how can you look at a business and say, “This is the right time to sell”? Every business is different, of course, but I like this question because so many people are curious whether they should sell now or in the future, and you’ve seen a lot of businesses. What’s your take on the right time to sell?

Greg: Did you know there are two primary sales seasons during the year for M&A?

Steve: Which ones?

Greg: The first primary sales season, which we’re just starting, is January to June. It’s a prime season because most companies that operate on a calendar year have to produce a federal tax return in the first half of the year. That document is foundational to valuation, due diligence, and financing for a transaction. So the best time to value a company and seek financing is when the ink is still wet on the tax return.

You can file an extension and file in the fall, but then that data is nine months old, and you’re forced to rely on internal documentation. There’s a wide range in the quality of internal accounting and bookkeeping at privately held companies and family businesses. But everyone pulls into port at the end of their year and is forced to do a detailed analysis and reporting for tax purposes.

Publicly traded companies, and I assume you invest in them as I do, have accounting standards they must meet to report earnings and trade on public markets. That doesn’t exist for family-owned, privately held companies. They may be up to a GAAP standard, or they may not. So the first half of the year gets you as close to a pedigreed set of financials as possible.

The second window is generally Labor Day to Thanksgiving. People come out of summer ready to get back to business, like kids going back to school, and we see a robust second season.

I can tell you that July, August, and December are generally slower in this business. People with means often want to enjoy summer, golf, and travel. They don’t want to be in conference rooms hashing out deals. And not many people put a business under the Christmas tree.

Steve: Well said. Not many people can fit a business under the Christmas tree.

How to Maximize Your Business Valuation

Steve: Let’s talk about valuation, since you have a lot of experience here. When someone starts thinking about an exit, what can they do to maximize their valuation?

Greg: Great question, and it’s multi-tiered.

At a very basic level, you only get one chance to make a first impression. If your website is antiquated, refresh it and make sure the images and device compatibility are up to date, so you make the best impression when people review you. If it’s a manufacturing business, clean up your boneyard or scrapyard. If you’re a retail business with old inventory, get rid of it, because no buyer wants to buy it. That’s the first thing.

Next, have systems that can be used in the transition. Do you have an employee manual? Do you have SOPs? Those things make a transition easier.

Do you have contracts? Recurring revenue and contracted revenue enhance value. A handshake agreement may not be as good for value as a five-year contract to continue doing landscape maintenance for a set of commercial buildings. Those things diminish risk, and diminishing risk increases value.

You likely understand multiples, but some of your audience may not. We hear multiples like four, five, or seven thrown around, but what do they mean? A four multiple means an investment with a 25% return on investment. A five means 20%. So it all comes down to diminishing risk, or creating an opportunity for appreciation, and those two things drive value.

I always tell sellers to treat it like a marathon with two miles left. Push your sales and your promotion. If we’re in meetings with buyers and you can say, “Let me tell you about the contract I secured this week,” that shows you’re not asleep at the wheel and that you’re still working in the best interest of the business. That’s much better than sales being down 5% this year and your answer being, “I’m just not as motivated as I used to be.” Performance reflects leadership, and your staff may not be working as hard either if they see you pulling out of the parking lot at 3:30.

Steve: I like that mantra of setting milestones and hitting them even when you’re under the microscope. Set goals, even small ones, and reach them to show you’re still active and still in the driver’s seat. That’s a really good approach.

The Number One Deal Killer: Hiding Material Facts

Steve: My favorite topic: mistakes. What are some of the most common mistakes you’ve seen in transactions, on either the buy side or the sell side?

Greg: Let’s start with the sell side.

Steve: What’s the most fatal mistake someone can make?

Greg: Not disclosing a material fact. You need to create an environment of full disclosure, because it mitigates risk.

If a buyer knows you have 30% customer concentration on a handshake deal, and they move forward with the transaction and that customer walks away, you have no liability as the seller. You discussed that situation.

But say you’re in the coffee business, and you know Starbucks has negotiated the end cap with a drive-thru in the new strip mall across the street. If you don’t disclose that, and the buyer later learns that you knew and anticipated a drop in revenue when that Starbucks opened, you could very well end up in litigation for not disclosing a material fact.

So I work really hard in our transactions to make sure buyers go in with open eyes. There’s enough risk in entrepreneurship already. Full disclosure is a wonderful safe harbor for the seller. If you’ve disclosed everything and the buyer moves forward, success or failure comes down to the buyer’s management ability. They’ll be better or worse than you, not exactly the same, and that’s where you want the variable to be.

We’ve seen leadership matter in a wide variety of arenas. I’m a football fan. When Saban was coaching at Alabama, they were advancing to national championship games. Since he left, they haven’t been in one. Leadership matters, and that’s true in any business.

In Seattle, where I’m based, it’s legendary at this point: Microsoft was stuck in the mud under Ballmer. Satya Nadella took the helm, converted Office to a subscription, and did a variety of other things, and the company has done very well over the last decade or so under his leadership. That’s about as big a company as you can redirect, and even there, executive leadership mattered.

Steve: Satya has done an incredible job. I’ve followed that turnaround, and it’s been remarkable.

Building Buyer Confidence

Steve: Say you’re a seller. What can you do to instill confidence in a buyer throughout the transaction? Obviously, disclosing material facts and being radically transparent, making sure everything is out in the open. But what else?

Greg: The first thing I would do is seek a buyer with relevant experience. The SBA looks for relevant experience in its loan guidelines.

Something exciting going through Congress right now is an increase in the SBA loan cap from $5 million to $10 million for the manufacturing sector, and I believe it will extend to additional sectors. It’s long overdue. You may have noticed there’s been some inflation in our society, and the $5 million SBA cap hasn’t moved in years. Businesses have increased in value just through organic growth in product pricing, with margins to the bottom line growing alongside them.

So relevant experience is very important. We’re usually fortunate enough to deliver choices to our clients, and you want to look at who can succeed as a successor and build up their confidence. Maybe you were a vice president at a company in this space but never sat in the CEO chair. You were groomed for this position, you’re ready, and it’s time to grab that brass ring and go for it. So it’s part pep talk.

It’s also making sure they’re not undercapitalized. Undercapitalization is often the reason businesses fail. All of those elements should instill confidence.

I would also say to surround yourself with a quality transaction team, on both the seller and buyer sides. You need an attorney who has been there and done that, and who knows where the middle of the fairway is on reps and warranties and indemnification, so you’re not running up bills chasing positions that are unachievable. You want a CPA who can come in and maybe do a quality of earnings review, so you go in with open eyes. If there’s real estate, you may bring in experts to do an environmental assessment, so you’re not buying into anything unknown. Or bring in an insurance broker to review coverage if a fleet of company vehicles is involved.

We often find that buyers can add profit just by shopping services where the seller stayed with the same provider out of loyalty, be it insurance or merchant services. If a company does $10 million a year in revenue and you can cut the merchant service fee by a quarter of a point, that’s a really nice vacation. That’s the kind of attention to detail that matters, and before the acquisition closes, you have time to look at relationships like merchant services, insurance, and communications to see whether they can be shopped and improved.

Steve: Well said.

Advice to a Younger Broker

Steve: That takes us to the finale. Knowing what you know now, what would you tell Gregory the business broker from 10 years ago?

Greg: Let me pause and think about that for a minute.

I would say be open-minded. In transactions, we’re working a Rubik’s Cube. You need to read and seek out diverse content. Podcasts can be a great source. The All-In podcast is one I listen to, because things discussed there may be ideas you can bring into transactions. They don’t need to be solutions.

And as a business broker, I was blessed to join a firm that had been around since 1975. If you’re going to be a business broker, join a large firm with tribal knowledge. It was very beneficial for me to sit down with the old hands and discuss the solutions they had found.

A common issue: say a company had its best year ever, with 25% growth over the year before. Was it a one-hit wonder, or a new platform to build from? How do you structure a variable component into a deal, where maybe you look at 2026 or 2027 revenue, or an average of the two, and have part of the price adjust if 2025 isn’t matched or exceeded going forward? A buyer should pay for what they’re acquiring. They shouldn’t pay for what doesn’t exist. I’m not a smoke-and-mirrors person.

I’ve sold one business four times, and it’s a good story. The first time was a retirement sale. The second time, unfortunately, the buyer was in a car accident and needed to sell for physical reasons. The third time, a buyer left the corporate world, bought the company, and improved it, but missed the corporate infrastructure, an HR department and a CFO, and didn’t want the helm anymore. They sold it for a nice capital gain. The fourth time, it was a merger within the industry. Each time, the business increased in value and had continuity moving forward.

That’s the type of story I want to be involved in. I want the seller to get a good market value for their business. I want the buyer to get an opportunity for a good return on investment and to go in with open eyes. I believe that’s the foundation of a win-win deal, which is my emphasis at IBA.

Steve: Very cool. Selling a business four times. I don’t think I’ve heard that before. What a great story.

About IBA

Steve: That takes us to IBA. What can you tell us about the firm, and where can people learn more?

Greg: Certainly, and thank you for the opportunity. IBA is the oldest and largest business brokerage firm in the Pacific Northwest, with 10 offices throughout Oregon and Washington. We’re a sell-side business brokerage firm, so we exclusively represent the ownership side of the transaction. We’re 100% paid on performance. We don’t charge any retainers or administrative fees. We only want to be paid by happy customers at project completion.

We’re also commercial real estate brokers, so we can comprehensively represent both the business and the real estate. Think of a winery with vineyards. As a firm, we can sell that whole package for the owners and properly value both assets.

I encourage anyone to visit our website, ibainc.com. I put an emphasis on education. My mom was a schoolteacher. I’d encourage anyone to look at our blog. It’s published twice a week, and we’ve had over 200 guest authors, including attorneys, CPAs, bankers, and ourselves, covering a range of topics.

For example, I recently wrote an article on how to handle gift cards and gift certificates in a transaction. It may seem like a very small detail, but the seller has collected money for them, and the buyer is assuming that liability. You need to negotiate a value for assuming that liability, because customers can’t be negatively affected.

Again, that’s why you hire an experienced, knowledgeable business broker. As a seller, you don’t know what you don’t know. You’re buying that experience and knowledge, and if you do, the i’s will get dotted and the t’s will get crossed.

Steve: Very nice. I’d never heard of the gift card issue before, but it makes perfect sense. Wherever you’re listening, on iTunes or Spotify, the links Gregory mentioned will be in the show notes. Thank you so much for coming on and sharing your wisdom, Gregory.

Greg: Thank you, Steve.